Did racism cause the financial crisis?

If the UK's equality czar thinks so, he's greatly mistaken.

By , Guest blogger

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    Trevor Phillips speaks on equality, fairness and economic recovery in London on Tuesday. Was racism one of the causes of the financial crisis?
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Trevor Phillips, the UK's equality czar, plans to tell a Westminster event today that the US banks' racism played a part in causing the financial crisis. He will argue that the banks routinely rejected blacks and other minorities for home loans. The only ones granted loans were those who were prepared much higher repayments – which they then couldn't keep up when the property market started to turn.

Er – right up to a point, but for the most part, quite wrong. Yes, there was a time when banks routinely redlined an area of town and simply refused to loan to anyone living in it. And yes, those areas tended to be the ones inhabited by blacks, Hispanics, Puerto Ricans and other minorities. But they also tended to be the areas with the most run-down property, the highest dependency on welfare programmes, and the worst unemployment. You can blame general American racism for that, or put forward lots of other reasons; but as far as the banks were concerned, all this meant was that giving loans in that area was a big risk.

This changed with the Community Reinvestment Act which President Carter signed in October 1977, and which President Clinton strengthened in 1991. The motivation of this legislation was noble. The banks should consider customers as individuals, and not reject them just because of where they lived. Quite so. And, thought Congress, banks had a duty to expand their lending among poor minority groups so that people in these groups could at last get onto the housing ladder and share in America's prosperity.

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What of course happened, though, is that this legislation further politicised the whole home-loans market (already politicised by the domination of the large government agencies Freddie Mac and Fannie Mae). The regulators made banks fully aware that if they did not lend enough to minorities, there would be sanctions and regulatory reprisals. So banks started taking on customers they knew were bad credit risks, forced by state regulators. Loaded with such bad business, their natural strategy was to dice it and slice it and sell it round the world in packages, so that nobody quite knew what they were buying. So when the housing market did turn, and people started to default on all those sub-prime mortgages that the legislation had forced on lenders, the banks in the UK and many other countries suddenly discovered it was their problem too.

Maybe some American bankers are racists. But many more American legislators are just destructively short-sighted.

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